By Dan Ferris in the S&A Digest:
A great quote from Richard Russell on yield:
Today the quest for yield, any kind of "safe" yield, goes on and on. The Fed has taken short rates down to zero. This allows the banks to borrow at extremely low rates and then to buy Treasury bonds at yields near to 4%. This allows the banks to accumulate fat, almost risk free, income. Thus the Fed has taken care of its own.
The big banks are flush with cash again. And all the while Americans are gasping for income like fish out of water. Leading bankers are making more money than ever, while the poor slob on the street is lying awake at night wondering how he's going to make the overdue payment on his home. Of course, his home is "underwater," since his home is worth less than his mortgage.
Yield chasing is a classic investor error and part of the speculative contagion that often ensues from the Fed's manipulation of interest rates. If you can't get a return, what do you do?
Yield chasing is one reason banks like Barclays and Bank of America bought CDOs. Some Wall Street genius sliced and diced a giant stack of mortgage paper, bumping up the yields with low-quality mortgages, while getting the ratings agencies to rate the whole thing triple-A. Government regulators did their part by requiring more capital to hold prime mortgages than triple-A-rated securities. That gave the banks just the nudge they needed to chase a few more points of yield, selling lower-yielding prime mortgages and buying slightly higher-yielding CDOs.
If you're thirsting for yield, be careful in general. And make sure to check out Tom Dyson's latest pick. Tom has found a stock that benefits directly from the yield-spread boon to the banking system described by Richard Russell in the quote above. From Tom's latest issue of The 12% Letter:
Today, I'm going to show you why I believe this community bank is the safest stock in America... it happens to be sitting on a gargantuan hoard of cash that represents almost 65% of its total market cap... This bank's stock is about to rise 50% or more... and you can get dividends as high as 11% a year if you invest today...
The CEO of this bank saw the real estate crisis coming, and steered his bank away from bad mortgages. In fact, he never bought a single subprime loan. Also, this bank has no debt, and it's made a profit every year since 2000 – as far back as we can find data. This is the safest financial stock we've ever seen. And you won't hear about it anywhere else.
A quick kudos to Dyson for his amazing performance in The 12% Letter. All 27 of the recommendations in his current portfolio are in the black. His biggest gainer is up almost 90% (almost every recommendation is up double digits). If you're looking for yield, you won't find a better advisory than The 12% Letter.
Crux Note: To learn more about The 12% Letter, and get the complete story on the "safest stock in America," click
here.
More on income investing:
Income advisor: this is "the perfect savings vehicle"
A foolproof way to earn big dividends from safe stocks
Why income investors should consider these stocks over bonds
